[jeff]

Welcome to the Q2 2016 CPA Exam Study Group for FAR.

Some BLITZ videos to help your exams: https://www.another71.com/ninja-blitz

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[JT]

The valuation account initially increased from 0 to 45k in year 1.

In year 2, the valuation account went from 45k to 15k because of the increase in the afs security. The question ask “what's the net effect of the valuation account (not oci) in year 2.

REG-80-1X
BEC-80-1X
FAR-73-1X
FAR-75-2X
AUD-September 2016

[MaLoTu]

what the heck is a valuation account? I thought OCI was where the holding gains were kept and losses were recognized on the IS.

[So FAR So Good]

@malotu – yes, you are correct. We do not carry the gain/loss on trading securities over to the available-for-sale category. The unrealized gain/loss on the trading security was already recorded in the income statement, so you would now transfer the trading security over to AFS with its current FV as the new cost basis under the AFS classification. The only change to the valuation account on AFS securities in this example would be the increase in value from $30 to $60, which would mean there would still be a credit balance of $15 in the valuation allowance account.

@Dab – I understand that the valuation account is going from 45k to 15k… on the credit side of the house (debit of 30 decreases the existing credit of 45). I actually understand entirely how the transaction works, I'm just hung up on the fact that they're using “decrease” as opposed to “increase,” as I have in the back of my mind that the valuation account is a debit for a gain and credit for a loss, so if we're increasing the value of the investment, why wouldn't the terminology in the corresponding valuation allowance account follow that train of thought? To say that the valuation allowance account has a “decrease” would imply that the valuation allowance account has a natural credit balance, but the fact is that it can be either a debit or credit account as it corresponds with gains/losses. I guess I'm just hung up on the terminology here… I don't see it as a “decrease” when it corresponds with a gain. I see questions like this and worry that I'll get tricked into thinking my methodology is flat out wrong.

F - 91 (6/5/2016)
A - 7/30/2016
R - 10/8/2016
B - 12/10/2016

[So FAR So Good]

@MaLoTu – to your second question, you are correct that fluctuations in unrealized gain/loss are housed in OCI for AFS securities, but there's another side to the entry you're missing. In order to book an unrealized gain, for instance, you would book a credit to OCI to recognize the holding gain, but you would also have to book a debit to the asset account to reflect that increase in fair value. A “Valuation Allowance” account is created as a way of tracking the fluctuation in holding gains/losses separate from the cost basis of the investment, which would just be something generic like “Investment in Available for Sale Securities.” Hope that helps.

F - 91 (6/5/2016)
A - 7/30/2016
R - 10/8/2016
B - 12/10/2016

[MaLoTu]

^yep, thanks … if you can find an example of a journal entry I would love to see it, this is the type of thing that is going to rear its ugly head during my exam! lol. Thanks. I am going to look back in my book to see if I can find one.

[KJ]

I look at the valuation allowance this way (T-accounts). When it was reclassified we debit AFS and when it was written down it was credited and there was a loss. So decrease fits in the equation. Don't know if this is the right way to look at it. I think at my exam on some questions I was overthinking and probably got the answers wrong and will be factor that I failed.

FAR - August 2016
AUD - September 2016
REG - October 2016
BEC - November 2016

Remember: "Everything should be made as simple as possible, but not simpler." - Albert Einstein

[MaLoTu]

@kanwal – the reclass had no effect on the valuation allowance. It was the one that was already classified AFS. It was written down in year one then increased in value the subsequent year.

I am still trying to visualize the JE …

[JT]

I hate that question that was mentioned though because it dabbles around another tricky point that I don't think is mentioned too often. I thought the answer would be 0 because that question states “the reversal is permanent”. If there is a permanent-‘unrealized loss' that loss actually becomes realized even though it's not sold. That's something to watch out for. If that happened then you would recognize the gain/loss on the income statement even though it's afs security and I believe the amount in the allowance account would be eliminated.

REG-80-1X
BEC-80-1X
FAR-73-1X
FAR-75-2X
AUD-September 2016

[MaLoTu]

@Dab, I ignored the permanent statement because of the things you mentioned. AFS are always on the book at FV, so if there is a change at the end of the year when they mark it to market it wont matter if it is permanent or not, plus really how could they know?!

[MaLoTu]

EPS question with a weird rule … try it out:

Strauch Co. has one class of common stock outstanding and no other securities that are potentially convertible into common stock. During Year 1, 100,000 shares of common stock were outstanding. In Year 2, two distributions of additional common shares occurred: On April 1, 20,000 shares of treasury stock were sold, and on July 1, a 2-for-1 stock split was issued. Net income was $410,000 in Year 2 and $350,000 in Year 1. What amounts should Strauch report as earnings per share in its Year 2 and Year 1 comparative income statements?
Year 2—Year 1
a. $1.78—–$1.75
b. $2.34—–$3.50
c. $1.78—–$3.50
d. $2.34—–$1.75

[Titleistg0lfer]

@MaLoTu is the answer A?

Year 1:

100,000 shares x 2 (Stock Split) = 200,000
350,000/200000 = $1.75

Year 2:

1/1 100,000 shares x 2 (Stock Split) = 200,000 x (3 months / 12 months) = 50,000
4/1 120,000 shares x 2 (Stock Split) = 240,000 x (9 months / 12 months) = 180,000
Shares = 230,000
410,000/230,000 = $1.78

REG: 84 (10/5/15)
AUD: 83 (11/23/15)
BEC: 77 (2/27/16) - The bubble sucks
FAR: 90 (7/20/16) - AND DONE FOREVER!!!!!

[MaLoTu]

Yes … I totally missed the fact that with comparative FS if there is a stock split in the subsequent year you have to recalc EPS to account for the split … which makes sense if you think about it.

[JT]

That's a good question.

I didn't know that.

REG-80-1X
BEC-80-1X
FAR-73-1X
FAR-75-2X
AUD-September 2016

[MaLoTu]

I am really struggling with Cash Flows … does anyone have any advice? I have done 15 problems and have only gotten 5 right, ugh. I watched the lecture and took notes, but it feels like some of the questions are contradicting and they (Becker) put the transactions in very broad categories, but the application is not so broad. I am really frustrated and this makes me feel like not studying. I will likely move onto another subject and revisit this, but if anyone has any helpful tip please let me know.

I just printed out my NINJA notes for CF and will read and write them.

[JT]

Really really general,…..

Operations have current assets and liabilities
Investing has long term asset items
Financing has long term liabilities and equity

I was really confused with cf statements but when I started thinking about it like this, it helped a lot. That list isn't perfect though. There are a lot of unique things in there.

REG-80-1X
BEC-80-1X
FAR-73-1X
FAR-75-2X
AUD-September 2016

[Author]

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